The non-profit sector is important. It employs more than two million Canadians and is a significant sector of Canada’s economy. It has major systemic problems.
First, we have declining charitable behaviour in Canada and because of that, a growing charity gap as our population grows. This is what Imagine Canada calls “an emerging social deficit.” There are increasing demands on charitable services that are outpacing the sector’s ability to meet that demand. With less available to cover charitable needs, our social fabric starts to unravel.
At the same time, our social problems persist, including gender bias, racism, environmental deterioration, human rights abuse and so on. Our approaches are failing to adequately address or resolve these issues.
Add to this the fact that many of the laws and regulations guiding the non-profit sector are more than 75 years old and thus outdated. We need greater inclusion and diversity. We need new legislation to empower social innovation and “for benefit” corporations.
Finally, most grant-making foundations are not providing taxpayer money in a timely manner. There are about 10,000 grant-making foundations in Canada, which generally help to financially support the 75,000 operating charities. These foundations have accumulated an estimated $100 billion in their investment accounts, based on their publicly filed taxation reports.
This significant wealth is growing each year, sitting on the sidelines, while charities struggle. Since donors to such foundations get a charity tax credit from the public purse, taxpayers have a right to demand better and to have their taxes used in a timely manner. It is unacceptable to hold taxpayer-funded money in perpetuity to support taxpayers not yet born or to solve future problems while the current environment deteriorates and people struggle in the interim.
There have been attempts to find solutions to the problems within the non-profit sector. In 2013, there was the report of the Commons standing committee on finance, Tax Incentives for Charitable Giving in Canada. In 2019, there was the Senate report, Catalyst for Change: A Roadmap to a Stronger Charitable Sector. In the 2021 budget, the federal government indicated its intention to raise the disbursement quota (DQ) — the required amount that grant-making foundations must make available annually for charitable purposes. It is currently just 3.5 per cent of their assets. But nothing has changed.
Despite the significance of the non-profit sector, and calls for a home in the government, it is not the obvious responsibility of any ministry. Even after the recent federal shuffle of ministerial responsibilities and the rewriting of new minister mandate letters, there is no single minister responsible for this file.
This is consistent with the Liberal government’s lack of action; consistent with its prior move to disallow the donation of private equity and real estate to charity; and consistent with its prior removal of the charity tax stretch credit for new donors (initiated by the Conservatives).
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Key actors in the non-profit sector need to move past the inertia of the federal government and start generating new solutions. The sector needs to become more independent and self-determinant, with sector actors providing advantageous policy ideas to government.
The following four policy changes could quickly trigger billions of dollars of value for the charitable sector, with zero cost to the federal budget:
1. Increase the disbursement quota. The DQ should rise from the current 3.5 per cent of foundations’ assets to a more meaningful eight per cent. A review of the DQ has been started by the Finance Department, but unless the government shows real leadership, the concern is that the Prime Minister’s Office will give in to the wishes of a few hundred wealthy vocal foundations (who do not want to be required to give away more money). The fear is that the federal government will only slightly increase the DQ – against the interests of the majority of unaware taxpayers and the tens of thousands of struggling charities who dare not speak against the interest of foundations which fund them. The government could make available billions of dollars more, but only if it raises the required disbursement to at least seven per cent of foundation assets. This would allow greater use of taxpayer money in a more respectful, timely manner. A further benefit is that a higher DQ has no cost to the public purse because the money is already in foundations’ investment accounts.
2. Create a new class of “non-issuing” private foundations. Some people who defend the interests of foundations claim a higher DQ may discourage future high-net-worth donors from setting up new foundations. I doubt this, because donors will still get to claim their charity tax credits immediately, and most donors wish to make a difference in their lifetime. Regardless, for those looking to set up a family foundation in perpetuity, a new class of “non-issuing” foundations could allow them to ignore the DQ, but they would equally not be eligible to issue charity tax-credit receipts to their donors. Simply put, by not triggering charity tax credits from the public purse, they would not be obliged to follow the DQ. All other Canada Revenue Agency foundation requirements would apply for this new classification.
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3. Create a two-tiered classification of charities. To help get Canadians to donate more to the most important social needs, the government should consider higher tax credit incentives for donation to charities addressing these missions. We can likely appreciate that not all charities in Canada are of equal value to our communities, so why should all tax incentives be equal? If the government truly wishes to create a zero-budget impact, it could offset the higher tax credits to tier-one charities by reducing the tax credit to less important charitable missions (as done in some other countries).
This is not a new or radical idea for Canada. We already have a two-tiered charity classification system. Currently, a $200 donation to a federal political party earns a higher tax credit than a similar $200 donation to a food shelter, a women’s shelter, or any other charity. Unfortunately, only federal political parties are in this top tier. It is time elected officials added other valuable charitable missions to their special tier-one classification.
To help decide which charitable missions are most important to qualify for the top tier tax credit, policy-makers can consider polling taxpayers to better understand what Canadians value most for their communities. The government could also task the Treasury Board to estimate which social problems cost the most to taxpayers. Ultimately, our elected officials need to make the tough decisions to do what is right. This is how democracy works.
4. Consider an annual 0.1 per cent levy on all assets in all Canadian foundations, to create a new “social sector fund.” This fund should then be administered by a self-governing “fit-for-purpose” agency of the sector, charged with addressing the problems and strengthening the overall performance. Such a small levy would have little negative effect on foundations, while generating more than $100 million a year for the new social sector agency to address previously identified sector-wide needs, such as:
a. Develop a “sector strategic plan” for the next five to 10 years (similar to what the Australian sector is doing).
b. Pay for the provision, hosting and training of a “digital conversion” for operating charities in the sector. Help (the majority of small) charities to become more effective and efficient.
c. Create a public campaign to help encourage more Canadians to be more giving. This would be akin to the “ParticipACTION” campaign to encourage greater exercise, but to encourage greater giving. This would address declining giving behaviour in Canada. A modest one to two per cent improvement in personal giving would ensure this initiative pays a positive return on investment..
d. Consider using funds to encourage donors to support various initiatives which governments may wish to avoid out of political concern (for example giving to diversity, gender equality, indigenous charities and marginalized communities).
d. Help encourage and teach charities to convert to digital filing of their annual tax forms to improve the quality of this important data set.
f. Use funds to conduct other research and information needs for the sector (beyond what the tax forms can collect). This would also help avoid any need to change the Income Tax Act to collect more data.
g. Host a library of information, best practices and impact measurement. Create something similar to the “What Works Network” in the United Kingdom.
No doubt there are many other needs, ideas and benefits to be submitted by others. The point is that the federal government must overcome its decade-long inertia. If we can propose policies that avoid asking Ottawa for more taxpayer money, policies that the majority of voters would applaud and policies that make elected officials look good, it would make for good politics, and we can pivot towards better results in the charitable sector. We just need the government to empower this pivot.
If you have other suggestions, ideas, and/or wish to vote on the ideas from others, please visit www.pivoter.org to have your voice heard and your votes counted. This is an initiative to support a “pivot for better” for our Canadian social (non-profit) sector.